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Municipal Bond Market Surges on Election-year Uncertainty, Fed Inaction

4 min read

The municipal bond market is riding a nine-year high this year: More than $193 billion flowed into public coffers across the nation through May.

Election-year uncertainty is helping boost activity as issuers try to get deals done before November. A motionless Federal Reserve funds rate is another factor, observed Josh Daniel, senior vice president of institutional sales at Little Rock’s Crews & Associates.

“At the end of ’23, we all thought we would have multiple cuts,” Daniel said of the Federal Reserve, which hasn’t altered its benchmark interest rate since July 2023. “And here we are halfway through 2024, and it looks like the Fed rate will be higher for longer.”

Many borrowers who waited in vain for interest rate drops after 11 hikes by the Federal Reserve during March 2022-July 2023 moved forward this year, adding to the surge of 2024 bond issues.

Arkansas’ contribution to the national five-month tally of muni bonds issued this year amounted to about $352 million. A mix of state and local government entities, including school districts, issued 22 muni bond offerings. This month, bond issues by school districts in Fayetteville, Cabot, Prairie Grove and Gentry boosted the state’s year-to-date count to more than $516 million.

The biggest of the group, Fayetteville’s, weighs in at $117.6 million to fund a three-year program to build, renovate and equip new and existing educational facilities. That June 4 offering was the largest municipal bond issue in Arkansas so far this year.

Among 13 Arkansas school districts that have issued nontaxable bonds this year, the next big three were at Cabot ($36.5 million), Rogers ($29.5 million) and Paragould ($26.2 million).

The second-biggest public bond offering in Arkansas through the first half of 2024 totaled $100 million in Mississippi County. In March, the city of Osceola issued new bonds to refinance a 2006 series of solid waste disposal revenue bonds for the Plum Point Energy project.

NRG Energy of Houston operates the 680-megawatt coal-powered generating plant. Plum Point began producing electricity in 2010 for the Missouri Joint Municipal Electric Utility Commission; Algonquin Power & Utilities in Oakville, Ontario; and East Texas Electric Cooperative in Nacogdoches, among others.

Plum Point Energy Plant, Mississippi County (Photo provided by NRG Energy)

Members of the MJMEUC include the cities of North Little Rock, Osceola and Piggott in Arkansas, along with Carthage, Kennett, Mal-den and Poplar Bluff in Missouri. The Arkansas Development Finance Authority typically leads the way among public entities in Arkansas issuing municipal bonds.

“We are the largest municipal issuer normally,” said Robert Arrington, ADFA’s director of homeownership and public finance. “But we just haven’t been as active this year.”

On April 15, ADFA completed a $50 million single-family mortgage revenue bond issue. The funds will provide low-interest financing for low- and moderate-income homebuyers who are first-timers or haven’t owned a home in the last three years or residents who live in one of 30 designated Arkansas counties.

“The bond rate of 4.84% will allow us to provide funds at a significant savings over market rates,” Arrington said. “We are currently at 5.875% for a 30-year loan.”

The $50 million pool, generated by a 40/10 mix of tax-free and taxable bonds, will fund loans through participating lenders.

“It was significant for us,” Arrington said of the $50 million bond issue. “It was the first time back with that particular credit in 10 years. “We’re getting ready to do another, targeting around the same size. It will be a game-time decision based on demand and on what rates are and several other factors.

“We hope to keep the program in perpetuity as long as the rate environment lets us,” he said.

Muni Bond Offerings Grow

Interest rate watching gave way to financial necessity this year as municipalities across America went to market with bond issues totaling nearly $194 billion.

That tally through the first five months of 2024 reflects funding demand that could no longer wait for a drop in prevailing interest rates.

(Arkansas Business)

Second-quarter municipal bond activity has remained strong even as the Federal Reserve in June held the line at 5.25% to 5.5% for an 11th consecutive month.

New issues during January-May accounted for $131.8 billion while refundings added up to $61.9 billion, according to the Securities Industry & Financial Markets Association.

The combined total is a whopping 35.1% increase compared with a year ago as the average daily value of bonds traded through May reached $12.8 billion, 19.7% higher than the same period in 2023.

The upswing in activity marked the continuation of a trend that began in the first quarter when municipal bond sales totaled $102.6 billion, more than any year since 2015.

 

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